(Reuters) -Russian producer RCC and Chinese firms have avoided taxes and skirted the impact of Western sanctions by trading in new copper wire rod disguised as scrap, three sources familiar with the matter told Reuters.

Copper wire rod was shredded in China's remote Xinjiang Uyghur region by an intermediary to make it difficult to distinguish from scrap, the sources said, allowing both exporters and importers to profit from differences in tariffs applied to scrap and new metal, the sources said.

Russia's export duty on copper rod was 7% in December, lower than the 10% levy on scrap. Imports of copper rod into China are taxed at 4%, but there is no duty on Russian scrap imports.

There are no legal obstacles preventing China from buying metal from Russian firms under Western sanctions. But manufacturers are worried about losing export business to customers - including those in the U.S. and UK - if they are known to be doing business with Russian firms.

The sources said some Chinese companies have set up new teams to deal with Russia-related business.

U.S. sanctions, aimed at minimising Russia's export revenues, can also mean difficulties with processing dollar payments as international trade is typically carried out in dollars.

Sales of new metal disguised as scrap, which started in December, are reflected in a discrepancy between Chinese and Russian data. There is no difference between sanctions on copper scrap and rod.

Chinese customs data showed China has bought significantly more copper scrap from Russia since December, while Russian figures Reuters obtained from a commercial data provider showed the amount of scrap exported to the country's biggest trade partner was negligible.

In response to a Reuters' inquiry on the discrepancy, Russian customs said: "The Federal customs service temporarily does not provide data on foreign trade." It stopped publishing trade data in April 2022, shortly after Russia's invasion of Ukraine. Since then, the market has relied on commercial providers.

    Asked about the trade in copper rod to Chinese firms, RCC, or Russian Copper Company, which is subject to Western sanctions, said it supplies products only to Russian companies. It did not comment further.

China's customs in Xinjiang, which borders Russia, did not respond to an emailed inquiry and a telephone call.  

China has become a major destination for Russian companies seeking to export their commodities after the United States imposed sanctions on Russia for its invasion of Ukraine in February 2022.

The United States and the European Union have also imposed sanctions on Chinese companies for supporting Russia's war effort in Ukraine.

DISGUISE

Shredding newly-made copper wire rod is an effective way to disguise new material that looks very different to scrap. 

The new, high-purity copper long, thin rods, mainly used for making power cables, are typically coiled for ease of transport.

Copper scrap, by contrast, is a mix of wires, tubes and pipes that have already been used. They are chopped into grain-sized pieces, or coiled and pressed like packs of noodles, for transport.

The shredding escaped notice as China has restricted access to the Xinjiang region in response to international condemnation of Uyghur repression, the sources said.

Apart from the financial incentive of avoiding taxes, the shredded metal is harder to identify and trace - making it easier to sell to Chinese manufacturers.

'DE FACTO COPPER ROD'

Last December, according to a commercial data provider, Chinese companies made a total of five purchases of products labeled as "copper rod" from RCC's plant in the Urals region. The purchases made by a United Arab Emirates-based entity called Modern Commodity Trading DMCC generated revenues of roughly $65 million, according to the commercial data provider.

The UAE-based firm could not be reached for comment.

Russia has never been a major seller of scrap copper to China.

However, from December last year, China's copper scrap imports from Russia rose significantly, customs data showed.

Most of that, 97% or 6,434 metric tons, came through the Alashankou border of Xinjiang in December.

Russian data showed a mismatch, indicating the country sold only 73 tons of copper scrap to China in the same month.

In 2021 and 2022 an average of 95.3 tons and 125 tons of Russian copper scrap were sold to China each month.

Volumes rose sharply over the last few months with monthly imports reaching 11,599 tons by February 2024.

Customs data on Chinese imports of copper wire rod is not publicly available.

"This scrap from Russia is de facto copper rod, but not declared as rod. I cannot disclose any more detail," said a Chinese manufacturing source who asked to remain anonymous. The source added the material could be directly consumed by copper fabricators in Jiangsu and Zhejiang provinces.

While Russian data showed minimal scrap exports, a sudden increase in wire rod exports occurred in December.

According to the data, Kyshtym Copper Electrolyte Plant JSC, a plant run by RCC, delivered 8,041 tons of copper wire rod to China via Alashankou in Xinjiang in December, compared with only 1,618 tons in November.

"As of today, Kyshtym Copper Electrolyte Plant sells its products only to domestic companies," the Kyshtym plant said in a response to Reuters questions on its sales to China.

"We have not monitored the products' further fate, so I have nothing to add to what has already been said."